The FTSE 100’s recent crash may cause many individuals to determine that they are better off using savings accounts to plan for retirement. Certainly, Cash ISAs and savings accounts are far less risky than the FTSE 100. But, at the same time, they offer far less return potential. This could mean that you end up with a rather modest nest egg from which to draw a passive income in older age.
As such, now could be the right time to start buying FTSE 100 shares for the long run. In many cases, they offer good value for money, as well as growth potential.
In the near term, the return prospects for the FTSE 100 appear to be highly challenging. The index is facing a period of potentially slower growth across the world economy, which could lead to lower levels of profitability for its members. In turn, this may cause investor sentiment towards FTSE 100 shares to deteriorate in the near term.
However, the index has experienced similar, and even worse, falls in the past. Among them are the 1987 crash, the tech bubble, and the global financial crisis. All three events caused a substantial decline in the index’s price level, but it was able to recover to post new record highs in the following years.
This has enabled the index to produce an annualised total return of around 8% since its inception in 1984. Compared to the returns on Cash ISAs and savings accounts, where beating inflation is a challenge at the present time, this could significantly boost your retirement prospects.
Of course, it may take the FTSE 100 a prolonged period of time to recover from any downturn it faces. For a short-term investor this could pose a problem. They may not have sufficient time to experience a recovery in the FTSE 100’s price level. But for someone aged 40 and who has 25+ years until they intend to retire, history shows that there is likely to be ample time for their portfolio to recover from any short-term challenges.
Furthermore, the track record of the index shows that buying shares while they trade on low valuations can be an effective means of generating high returns. At the present time, for example, a number of FTSE 100 shares have a mix of high yields and low price-to-earnings (P/E) ratios. This suggests that they offer wide margins of safety, and may be able to deliver relatively high returns in the coming years.
Clearly, starting to invest in the midst of a turbulent period for the FTSE 100 may not seem to be a good idea. It may cause paper losses in the near term. But, over the long run, it could have a positive impact on your retirement prospects.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.